May 31, 2014

I am a whistleblower, on lousy bank regulators, and FT, not withstanding its “Without fear and without favours”, also ignores me.

Sir, William D Cohan writes about the travails of “Wall Street whistleblowers”, May 31. In it he writes about “how little the regulators charged with keeping watch over the Wall Street banks seem to care about holding them in any way accountable”. The same can be said about how little those in charge with keeping watch over the regulators, like the Financial Times, seem to care little about holding them in any way accountable.

Since years back I am a whistleblower, on the Basel Committee for Banking Supervision, accusing it for having designed absolutely useless and even dangerous bank regulations. And though very few can demonstratively prove to have alerted from a reasonably high position bureaucratic post about what was wrong, the silence with which FT has met all my comments, has been deafening.

Just as an example, in a written formal statement at the World Bank, as an Executive Director I warned “

We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

And FT itself published one letter, in January 2003, in which wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is”; and another letter, in October 2004, in which I asked “How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?” 

But, just in case, am I arguing that anyone of the regulators has committed and illegal act for which they should be jailed? Of course not! Only that they have been so dumb that we need to parade them all down Wall Street, wearing dunce caps – or cones of shame… in order to increase our chances that the regulators think twice next time they feel as Masters of the Universe… and perhaps they should be joined in the parade by the editor of FT.

PS. One day perhaps there will be a whistleblower within FT willing to explain it all :-)

We used to drill for the A-bomb threat… but got hit by the AAA-bomb.

Sir, I belong to that generation that Gillian Tett refers to and who in the 50s and early 60s crouched under tables preparing for the A-bomb threat, “From fire drills to firearm drills” May 31,

50 and some years later I am now wondering what drills could be useful for a society in order to avoid that kind of AAA-bomb the Basel Committee launched at our banks, when they allowed these to leverage their shareholder’s equity a mindboggling 62.5 to 1 times (or infinitely in the case of sovereigns) only because something got an AAA credit rating issued by humanly fallible credit rating agencies.

May 30, 2014

More than “risk” it is “absolute safety” which was and is mispriced in the risk-weighted capital requirements for banks.

Sir, I refer to Bilal Khan´s letter “The lesson of the crisis was the mispricing of risk”, May 30, commenting on Martin Wolf´s “Disarm our doomsday system” May 28.

In it the economist and former central banker from Pakistan Khan suggests “a rethink on risk based capital requirements in general and the risk-free status of sovereign debt in particular”. 

Indeed I think he absolutely right as you should have learned from the over 1.300 letters during soon a decade that I have written to you on the subject. For some reasons, I hope not just because of petty mindedness, you decided to ignore more than 99% of these letters… thinking perhaps the theme was not important enough for FT.

As a reminder, before I got censored, in October 2004 you published a letter in which I asked “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?

But let me here argue with slightly cheek in tongue, that what was mispriced was not “risk”. The 8 percent basic capital requirement of Basel II, when lending to “the risky” medium and small businesses, entrepreneurs and start-ups was clearly more than sufficient. What was and is really mispriced is “absolute safety”, "the infallible" like the AAA-rated securities, the housing sector in Spain, the sovereign loans like to Greece and other similar.

May 29, 2014

Maybe it is time to revisit the whole concept of progressiveness in taxes.

Sir, John Gapper, perhaps solely wearing his hat of a writer, basically proposes creating a publisher monopoly in order to counter the growing strength of a distribution monopoly such as Amazon, “Publisher must become giants to take on Amazon”, May 29.

As a reader, I am not certain I want to be squeezed by those who clearly would then have an interest coming into some agreements that might not benefit me, though the truth is that technological advances married to the reach-out of globalization, do seems definitively to be leading us down that path.

And what can we do to keep alive our alternatives? I have not given too much thought on how it could be implemented but I think that the introduction of tax-rate progressiveness, for corporate profits and or dividends, based on market shares, could be something worthwhile to explore.

Why for instance should “The Shop Around the Corner” have to face the same tax structure as Amazon?

And of course, in the same vein, why should a company that fights naked and unprotected in the markets face the same tax structure as one that operates under the protection of intellectual property rights?

May 28, 2014

What can an insignificant ego like mine, even if absolutely right, do against significant egos, even when these are absolutely wrong?

What is perceived as risky never constitutes much real risk. What most drives a financial doomsday machine is what is perceived as absolutely safe; which is why risk-weighted capital requirements for banks based on perceived risks, which favors bank lending to “the infallible” is so absolutely dumb.

But unfortunately that seems too difficult to comprehend, for instance by Martin Wolf.

When he now begs for to “Disarm our doomsday machine” May 28, Wolf still shows no sign of having understood how dangerous the pillar of our current bank regulations really is. Why do I say so?

Wolf quotes Timothy Geithner saying “The safer the visible financial system is made, the greater the danger that the fragility will emerge somewhere less visible”, and connects that to the need of “preventing such obvious absurdities as the build-up of huge off-balance sheet positions in vital institutions. And though that might have some truth to it, the real fact is that currently it is the visible financial system that has been made dangerous, by trying to make it safe. For instance look at hedge funds and you will see that they never ever can achieve leverages similar to those authorized banks to have by regulators, if keeping to the “absolutely safe”.

No the best way to “disarm our doomsday machine” is to get rid of the distortions produced by risk-weighting, and to follow the simple rule of not procrastinating, meaning solving the problems while they are still small.

In May 2003, as an Executive Director of the World Bank I told bank regulators gathered to discuss Basel II “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises. Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

And though I am still not a regulator I still stand by that.

Mr. Martin Wolf. Currently we still have regulations which guarantee banks holding especially little capital when what is especially dangerous, one of “the infallible”, blows up. Disarm that AAA-bomb! Capisce?

The fact is that big egos can be just as dangerous as the tyranny of William Easterly’s experts.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

Mme Lagarde, bank regulators also violate basic ethical norms, and prize short term security over long term prudence.

Sir, I suppose you held your “Conference on Inclusive Capitalism” without one word referencing how the risk-weighted capital requirements for banks, in the name of stability, exclude “the risky” from having fair access to bank credit, even though “the risky” have never ever caused a major bank crisis. 

Emily Cadman and Sharlene Goff report that reeling off a list of recent scandals including money and the manipulation of Libor, Ms Lagarde said: “some prominent firms have even been mired in scandals that violate the most basic ethical norms”. And Mme Lagarde also stated “The [financial] industry still prizes short-term profit over long term prudence” “IMF’s Lagarde attacks financial sector for blocking reforms”, May 27.

Mme Lagarde is absolutely right, but, as I see it, the truth is also that on both counts, bank regulators are even guiltier, as a result of imposing risk-weighted capital requirements on the banks. That risk weighting allow banks to earn much higher risk-adjusted returns on equity when lending to “the infallible”, than when lending to “the risky”. 

And that causes of course a highly unethical discrimination against “the risky” and, since it distorts the allocation of credit in the real economy, it also evidences that regulators prizes much more short term security than long term prudence.

And in fastFT we also read that Mark Carney the governor of the Bank of England stated “there is growing evidence that relative equality is good for growth. At a minimum, few would disagree that a society that provides opportunity to all of its citizens is more likely to thrive than one which favours an elite, however defined” 

Absolutely, but frankly, who is Mark Carney to talk about this? As a chairman of the Financial Stability Board, he has for many years approved these risk-weighted capital requirements for banks, which so favours the access to bank credit of the “infallible sovereign” and the AAAristocracy elite.

And Mark Carney also stood there straight faced and said “Banking is fundamentally about intermediation – connecting borrowers and savers in the real economy” Have these regulators who so distort the intermediation no shame?

Sir, as a former Executive Director of the World Bank, now Civil Society, whatever that means, I have formally directed question related to these capital requirements, twice to Mme Lagarde and once to her predecessor Strauss-Kahn … and both responded as if they sort of understood what I was talking about.

And to that add, at least, 50 events at the World Bank at the IMF and others like this during which I have questioned these capital requirements… and of course on IMF's blog... but clearly to no avail.

And so in this respect may I argue that IMF’s silence on the risks of risk-weighting, is blocking as much or even more than the financial sector, the so much needed reforms.

May 27, 2014

Who is Mark Carney to talk about inequality and about undermining the basic social contract of fairness?

In fastFT we read: Inequality is “demonstratively” growing and risks undermining the basic social contract of fairness, warns Mark Carney the governor of the Bank of England. 

Who is he to warn about this? As a chairman of the Financial Stability Board, Mark Carney has for years approved risk-weighted capital requirements for banks, which discriminate against bank lending to “the risky”, those already discriminated against, precisely because they are perceived as “risky”, and favors bank lending to the “absolutely safe”, those already favored, precisely because they are perceived as “absolutely safe”.

The only bubble our young unemployed really need is the one really absent, having been prohibited by bank regulators.

Sir, Patrick Jenkins writes “There are other bubbles out there beyond UK house prices” May 27. He is of course right. But in the same way that a stress test on banks should not only include what is on their balance sheets but also what is not, an inventory of bubbles should also analyze the absent bubbles.

And in this respect let me assure you that the most conspicuously absent bubble, in the UK, in Europe and largely in America too, is the one our young unemployed most needs, and I refer to the “Medium and small businesses entrepreneurs and start-ups” bubble. That is the bubble that has been prohibited by the risk-weighted capital requirements for banks imposed by our dangerously risky risk adverse bank regulators.

More on "Bubbles"

May 26, 2014

High noon to end Basel Committee's populist risk-weighted capital requirements for banks.

Sir, John Dizard quotes Christopher Whalen, senior managing director at Kroll Bond Rating Agency saying:“FSOC is the leading boring example of boring but cumulative changes in the regulatory system that are forcing us into deflation. Nobody seems to be paying any attention, but this is having a chilling effect on credit.”, "High noon for Dodd-Frank reform", May 26.

But also, because of the risk-weighted capital requirements, with respect to bank credit to "the risky", like to medium and small businesses, entrepreneurs and start ups, it has been more than chilly, for much too long; resulting in that bank credit to "the safe" sovereigns, AAAristocracy or the housing sector, has been too hot. And in consequence, with respect to the whole Basel regulatory paradigm, it is way high-noon for a reform.

On FT's first page we find an article that proclaims "France's FN leads surge of populists" which implicitly assumes somebody knows what is not populism nowadays. We would like to know that. I say this because as I see it the whole concept of risk-weighting, as if trusting you could order some risk-weighing that leads to more safety an greater stability, is as populist as populist comes.

You want your kids to be safe? Order them to stay in bed, all the time...and then see what really great dangers that entails!

May 23, 2014

Banks, thanks to regulators, only excavate the successes of yesterday, while not seeding those of the future

Sir, Gary Silverman writes "On one of its biggest nights of the year, the music industry could think of nothing better to do than recycle one of its dead in the form of a high-tech light show. The people who did it aren’t creators. They are excavators.", "Michael Jackson is good for bonds", May 23.

And it amazes me how a FT writer can come up with such an insightful statement looking at what is happening in the music industry, without realizing that that is precisely what has been ordered for our banks by their regulators, by means of their risk-weighted capital requirements.

So let me explain it this way. Currently banks are allowed much higher risk-adjusted returns on equity when excavating "the safe", who many were "the risky" of the past, than seeding the risky, those who could become the safe of the future. Capisce!

May 21, 2014

The deafening silence of universities on The Basel Committee Distortion is scary.

Sir, I refer to John Kay’s “Angry economics students are naïve- and mostly right” May 21.

When John Kay invests his capital he looks at risk and returns when deciding what to do. How would it impact his decisions if suddenly the government told him “Citizen Kay, if you invest in what is perceived ex ante as “absolutely safe”, I will pay you additionally a couple of hundred basis points.”? Would he also think that subsidy carries no cost?

Allowing banks to hold less capital when lending to “the safe” than when lending to “the risky” causes banks to earn much higher risk-adjusted returns on equity when lending to “the safe” than when lending to “the risky”, and this means, no doubt about it, that banks will lend too much to “the safe” and too little to “the risky”.

And so though I am not an angry economic student, I am an economist very angry with our universities for ignoring the distortions caused by the risk-weighted bank capital requirements in the allocation of credit in the real economy. Their deafening silence on this issue makes it so much harder to extract an explanation from the regulators who in my mind are either blind or plain stupid.

That you for instance can obtain an MBA from Harvard, or get a CFA certification, without having been made aware of the existence of The Basel Committee Distortion, and much less of its financial consequences, is truly scary.

May 20, 2014

Banks should pay all fines by issuing voting shares.

Sir, I refer to Kara Scannells’and Stephen Foley’s “Credit Suisse to pay $2.6bn in tax case” May 20 and to all other reports about bank fines.

All these fines go against bank’s capital accounts, and will therefore, because of bank capital requirements, cut down on the credits a bank can give.

And that hurts mostly the innocent… those who will now not get a credit because the bank does not have the shareholders’ equity to back it up with.

The only way out of it is to force all bank fines to be paid by the issuance of bank voting shares, at their current market value, for an amount equivalent to the fine.

To do elsewise is, as I see it, only statist sadism.

Is it ok for a regulator, like EBA, to withhold information from “experienced investors”?

Sir, in previous letters to you, here and here I have expressed concern about what would be the legal responsibility of bank regulators, towards any coco-bond investors, if they withheld important information with respect to the possibilities of those bonds being converted into bank equity.

And now Sam Fleming and Martin Arnold report that the European Banking Authority, EBA, is also expressing some concerns on this issue, “European regulators seek to limit retail sales of bank credit”, May 20 (though not in the US FT issue).

But something is not clear… after the article refers to several reservations about these cocos being sold to retail clients, it informs that “Britain´s regulator, the Financial Conduct authority, has said it plans to consult on new rules to ensure cocos are only marketed to experienced investors”

Would that imply that a regulator can withhold important information from “experienced investors”? If so, just in case, for the record, I have no knowledge about investments whatsoever.

May 19, 2014

Europe cannot afford its banks not being able to lend to “the risky” because of bad capital regulations.

Sir, I refer to Wolfgang Münchau “Draghi has missed the chance to act on inflation” May 19.

When managing risks, before discussing risk avoidance, one need to clearly establish what risks one cannot afford not to take. And, in bank supervision, a risk one cannot afford to take is that of banks allocating credit inefficiently to the real economy.

But Europe, like other, thanks to dumb regulators, by means of capital requirements for banks based on ex ante perceived risk, has de facto dramatically increased the risk-aversion of its banks. And in these days of scarce bank capital, those poor bastards who have received a 100 percent risk-weight, like small and medium sized businesses, entrepreneurs and start-ups, those which as a group have always suffered the consequences of a financial crisis, but never caused it, are being increasingly locked out from access to bank credit.

In this respect ECB would be absolutely right in that it “may also encourage banks to lend money to small and medium sized businesses”, though the best way to do that would of course be for Mario Draghi and ECB to admit the regulatory mistake and get rid of the distortions produced by risk-weighting.

Frankly, when compared to the importance for Europe of their banks being able to take risks on “the risky” Münchau’s discussion on the consequences of having 1 or 2 percent inflation, sounds quite surrealistic to me.

PS. Again, you should not confuse the risk of dangerous large exposures to “the infallible” with the normally much safer as a group exposures to “the risky” paying high risk premiums.

May 18, 2014

Bank regulators don’t dare hold “morbidity and mortality reviews of bank crises”, less these would find them responsible

Sir, Timothy Geithner while lunching with Martin Wolf refers to “Complications: Notes from the life of a young surgeon” by Atul Gawande and states “It was a fascinating book, in part because [Gawande] described how in that profession they do things that in economics we don’t do that well. They have this thing called morbidity and mortality reviews each Friday where they go over mistakes”, “Stresses and messes” May 17. And Wolf agreed with that “central banks don’t like analyzing their past mistakes but should.”

Indeed, how could bank regulators allow banks to hold much less shareholder’s capital against those perceived as “safe”, than against those perceived as “risky”? Could they not understand that allowed banks to earn higher risk adjusted returns on “safe” assets than on “risky” assets; and that this would distort the allocation of bank credit, and doom the banks to end up holding too much “safe” assets and too little “risky” assets.

Because of course, as they all should know, it is when banks hold “too much” of a “safe” asset when an asset could turn into a very risky asset for the banks. Empirically this is something well proven. Never ever has a major bank crisis resulted from excessive exposures to what was perceived ex ante as “risky”, these have all, no exceptions, resulted from excessive exposures to what was ex ante, erroneously perceived as safe... like AAA-rated securities, Greece, etc.

And besides, holding “too little” of the “risky” assets, like loans to medium and small businesses, entrepreneurs and start ups, is very bad for that part of the real economy which thrives on risk-taking, and is therefore, in the medium term and long term, something also very risky for the banks.

So YES! Bank regulators should hold “morbidity and mortality reviews”... but they don’t dare since these would find them the responsible.

And, if they did, I am certain Geithner and Wolf would also have more productive luncheons discussing bank and financial crises.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

May 17, 2014

To measure the real costs of bank credit look at those 100 percent risk weighted. The sovereigns are subsidized

Sir, when Peter Spiegel writes about Italian and Spanish borrowing costs are at the lowest levels since the euro´s launch, I presume he refers to the borrowing costs of the sovereign Italy and Spain. I say this because I am sure of that if he went down to the poorer quarters where the Italian and Spanish small businesses and entrepreneurs hang out, he would, at least in relative terms, find a quite different reality, “The eurozone won the war – now it must win the peace” May 17.

One of the current problems is being able to separate the effects from real lower risk appreciations of sovereigns, from the subsidies that much lower bank capital requirements when lending to them imply. In these days of extreme bank capital scarcity the low rates paid by sovereigns might hide the fact that other borrowers have to pay higher rates or do not get access to bank credit at all.

As I see it the eurozone has won no war… it has not yet even discovered who one of the real enemies is, namely that absurd and dangerous risk aversion introduced by its bank regulators. Real peace in Europe, besides other requires throwing away the whole concept of risk weighted bank capital requirements.

May 16, 2014

Tax the 1 per cent with no other changes and all you get is the 1 per cent of the 1 per cent becoming even wealthier.

Sir, I refer to Richard Robb´s “If you tax the 1 percent it is the middle class who will suffer” May 16.

He is absolutely right and I have myself made similar arguments in an Op-Ed published in Venezuela about a month ago.

That said, what Robb misses is that 99 percent of the 1 percent would, though quite bearable, suffer too, because unless the current wealth concentration channels are altered, the resulting flows would just signify that the 1 percent of the 1 percent, the real plutocrats would become wealthier.

What so hard to understand about Venezuela´s woes?

Sir, John Paul Rathbone writes “For many outsiders and for many insiders too, Venezuela is maddening hard to understand”, “Latin America´s trust-fund kid needs a reality check” May 16.

What is so hard to understand about that? When an oil income that should represent a monthly check of about US$ 200 for each of the 29 million Venezuelans, is handed over to a trustee who acts as it was his income and decides with some very few assistants on what to do with all of it, something is bound to go wrong.

Or does he imply that Obama, Cameron or Merkel would be able to efficiently decide upon the use of over 97 percent of all USA´s, UK´s or Germany´s exports? Or that their respective democracies would remain the same if concentrating so much power in their hands? I don´t think so!

What is truly hard to understand though, to the point of being surrealistic, is how they insist in that changing the trustee will do it, and not in changing the system, by handing each Venezuelan their God sent natural resource dividend.

May 15, 2014

With respect to the UK housing boom FT has not earned the right to criticize much.

Sir, you express a lot of concern over excessive financing of houses, like the Help to Buy scheme, “Carney and the UK housing boom” May 15.

But you never express concern about the sad fact that if a bank lends to a small business or an entrepreneur, those who could help create the jobs by which house owners could pay their bills, then it needs to hold much more equity than when financing the purchase of a house.

And this of course means banks make much higher risk-adjusted returns financing houses than financing jobs… which is pure lunacy… and that of course means immensely more subsidizing of houses than the Help to Buy could ever aspire to signify.

And so with respect to this I consider that FT has not really earned the right to criticize that much.

If erasing, Google must be sure it is duly authorized to do so, and should keep a public record on the erasers

Sir in principle I agree with John Gapper in that “People do not have the right to erase the web’s memory” May 15. That said, thinking on my own youth, and though I do not remember all my doings very well, I guess there might have been occasions when I was lucky these were not memorized by a web, and so I guess my grandchildren should have the same right.

What I am more concerned about is the possibility that someone else instructs Google or someone in Google takes it upon himself, to erase without authorization one of my memories causing me to suffer from web Alzheimer. And in this respect, were the erasing to start, then Google needs to make sure the erasing is authorized and keep a public record of all erasing going on preferably with an identification of what was erased, a photo or something else. At least in this case John Gapper could have seen that his developer was hiding something. 

And what if there is a photo of two and one wants it erased and the other dearly wants to hang on to the memory?

May 14, 2014

Martin Wolf it is not time for Mario Draghi to open the sluice but to get rid of it.

Sir, Martin Wolf writes “Time again for Draghi to open the sluice” May 14. Why does Martin Wolf not get it? Even when Ingram Pinn’s great illustration so clearly depicts it?

The problem is that the risk-weighted capital requirements for banks constitute a sluice which artificially channels financial resources to where the risk adverse regulators think they should go to, and hinders these to go to where the real economy most needs them.

Wolf writes that “the aim must be to restore a healthy recovery”. Indeed and that must of course begin with destroying that sluice… though of course, the problem with that is that Mario Draghi, as a former chairman for many years of the Financial Stability Board, is one of those who constructed it… and does not want to admit what an extraordinarily bad job they did doing so.

Europe, let your bank credit flow free!

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

May 13, 2014

Is it ethical to expect high yields, no matter what? Like on a bond issue to finance a concentration camp?

Sir, Elaine Moore writes “More than 40 people have been killed in street protests [in Venezuela] involving supporters and opponents of the government”, “Unholy EM debt trinity tempts with high yields” May 13. And any investor who has done any reasonable due diligence on Venezuela would now that is only a small part of the tip of the iceberg, as Venezuela’s constitution, not the least on public debt issues, is blatantly and continuously being violated.

And so I ask, if an investor buys the Venezuela May 2023 bond yielding 12.5%, and Venezuela later, thanks to its oil has the money to repay, should he have the right to collect on his full yield expectations, independently of what the Venezuela government might be doing to its citizens?

As far as I am concerned, as a Venezuelan, I will do whatever I can for these investors not be able to collect on their juicy risk premiums. In other words I will try my utmost, to make their risk perceptions come true… and then some.

Has this issue not much more to do with ethics than with portfolio returns? I am of course by no means implying it is the same… but, what if in similar low interest rate environment, there had been a 10 year bond issue offering a 12.5% return in order to finance the construction of an Auschwitz type concentration camp… to be repaid with whatever could be confiscated and extracted from its victims?

Should all we citizens around the world not hold investors, and especially those investments banks who arrange the primary issues, to some higher ethical standards for our own mutual good?

Do we not really need ethic ratings more than credit ratings? 

May 10, 2014

A virtuous circle or cycle in Europe? Hah!

Sir, you hold that “Mr Draghi may not have to go down the QE road. There is growing sentiment in financial markets that the ECB chief’s credibility has already created the virtuous circle Europe needs to emerge from the crisis. Lower bond yields are improving credit conditions across the eurozone”, “Draghi must tackle threat of deflation”, May 10.

And Ralph Atkins also refers to the same “virtuous cycle” in “Draghi’s bluff closer to being called”.

What can I say? As I see it the risk weighted capital requirements for banks which favors immensely bank lending to the “infallible sovereigns” over any lending to “the risky” medium and small businesses, entrepreneurs and start-ups, has placed Europe in a vicious circle, or cycle, in a real death-spiral.

And Mario Draghi, as a former chairman of the Financial Stability Board, bears much responsibility for that.

Why on earth should there be any Quantitative Easing in Europe if the liquidity provided cannot flow freely to where it is most needed?

May 09, 2014

What is a European bank to do, but to help inflate the sovereign debt bubble and pray?

Sir, I refer to Claire Jones and Ferdinando Giugliano reporting “Draghi signals imminent action to combat eurozone inflation” May 9.

So what is a European bank to do if there is more liquidity, the ECB pays nothing on deposits, and it has no capital to meet the capital requirements for lending to anyone else but to sovereigns? It has no choice but to help to inflate the sovereign bubble… and of course join whole Europe in prayers for that these central bankers know what they are doing.

As you know... since they do not understand that risk-weighted capital requirements for banks creates huge and dangerous distortions in the allocation of bank credit, at least I do not think they do know what they are doing.

What could be happening to Martin Wolf?

This letter I am not sending to the Editor… as I do not want to put him in a tight spot.

Martin Wolf writes “Shareholders alone should not decide on AstraZeneca” May 9. 

Who says they do? They might have the last word yes, but their decisions are filtered through a market that considers, more or less, sometimes in ways that cannot be understood, sometime correctly and sometimes incorrectly, all those other factors that Wolf enumerates. 

Wolf does not want the deal go through… he is free to pressure, as he does… but should Wolf also have a final word on AstraZeneca? I don’t think so… and I believe the Editor would agree.

Should workers or government intervene? If they want… they are free to try.

Frankly Martin Wolf’s positions during the last weeks, like when he proposed to “Strip private banksof their power to create money” and put that exclusively in the hands of even fewer public actors; like when he wanted to “Wipe out rentiers with cheap money”; like him repeating over and over again his mantra about fixing the world with government deficits and infrastructure investments; and now this, breathes desperation of some kind. What could be happening?

May 06, 2014

Taxing property or inheritance could, ceteris paribus, only lead to more inequality.

Sir, I refer to Janan Ganesh’s “Tory tax on property is perfect for the Piketty age” May 6.

If I was to make a fast list of what has increased inequality during the last decades that list would include rent extraction, crony capitalism, excessively exploited intellectual property rights, the power of global brands, be it Coca Cola or Real Madrid, the force residing in monopolies or excessive market shares, how managers have taken away corporate control from shareholders, and how bank regulators have allowed such incredible high leverages in the banks while ascertaining to the public these were sound institutions… inheritances would not be on it.

And if I was to combat inequalities I would not start by taxing properties or inheritance since, in the great scheme of things, ceteris paribus, meaning money will keep on flowing how it normally flows, that could lead to even more inequality.

Do I have any suggestions? For a starter two:

First all profits derived from operating under the protection of intellectual property rights or excessive market shares, should be taxed at a higher rate that profits obtained by competing naked in the market.

Second, the tax deductibility as an expense of any salary should be limited to fifty times the median salary of the nation.

Our finance markets should not be regulated with a pro-statist ideology bias... that’s too dangerous.

Sir, Stephen Foley writes that “New [US money market fund industry] rules look set to reduce short-term borrowing costs for the US Treasury, at the expense of higher interest charges for corporate borrowers”, “Fund industry reform is a win for Uncle Sam”, May 6.

Foley should reflect on that in fact all regulations during the last decades have been a win for governments and a loss for citizens. In November 2004 in a letter that FT published (before I was send to Siberia) I wrote “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

Just this week, during a conference at the Brooking Institute, I asked again, for the umpteenth time, whether higher capital requirements for banks when lending to businesses than when lending to sovereigns did not distort the allocation of bank credit. Mr. Jörg Decressin, the deputy director in the IMF’s European Department, the former deputy director in charge of IMF’s Research Department, gave me a surprisingly honest answer. Here follows its short version.

“Do you believe that governments have a stabilizing function in the economy? Do you believe that government is fundamentally something good to have around? If that is what you believe then it does not make sense necessarily to ask for capital requirements on purchases of government debt…

If on the other hand your view is that the government is the problem then you would want a capital requirement, so it depends on where you stand [ideologically]”

What a mess! Who authorize the regulators to regulate the finance sector applying their ideology? It is not a question whether the public or the private, it is a question of an adequate equilibrium between those two, and that has obviously been broken, to everyone’s peril.

Martin Wolf, again, our banks are not supposed to be the cautious rentiers our too risk-adverse regulators want them to be

Sir, Martin Wolf, with quite a show of contempt for our traditional savers who have done nothing wrong writes: “cautious rentiers no longer serve a useful economic purpose. What is needed instead are genuinely risk-taking investors.” “Wipe out rentiers with cheap money”, May 6.

It is clear that Wolf keeps wearing those same blinders that have kept him from understanding (or wanting to understand) how capital requirements for banks based on perceived creditor risk, not only distort the allocation of credit to the real economy, but also turn our banks into a new class of cautious rentiers.

Therefore, when he writes “to many, it seems sensible to postpone investment until the world is more predictable”, and cries out for some risk-taking investors, he fails to understand this represents precisely the moment when we most need our “risky” risk-takers, like the medium and small businesses, the entrepreneurs and start-ups, to get going; and similarly fails to understand how these risk-takers are currently being so perversely locked out from access to bank credit… by the regulators!

How can we take of those blinders from Martin Wolf? Sir, I have tried it umpteenths of times, to such an extent he has expressed not wanting to hear one word about it more from me. Could you be of any assistance?

PS. Sir, as I just told you, I am not copying Martin Wolf with this. If you want to do so it’s your decision and your risk :-) 

May 03, 2014

Ever more complex finance requires denser and duller, bordering on brain-less, hard-headed stubborn bank regulators.

Sir, Tracy Alloway writes “If the institutions which create these [sophisticated financial] products cannot correctly asses their value, then what hope is there for us?”, “Ever more complex finance parts way with economic reality” May 3.

Indeed but it is worse than that… because what hope can we have that our bank regulators understand those products? In 2003, when Basel II was being discussed I told some hundred regulators during a workshop the following: “Let me start by sincerely congratulating everyone for the quality of this seminar. It has been a very formative and stimulating exercise, and we can already begin to see how Basel II is forcing bank regulators to make a real professional quantum leap. As I see it, you will have a lot of homework in the next years, brushing up on your calculus—almost a career change.”

The truth is that regulators did not know what they were doing with simple Basel II and they know of course much less with Basel III, which is about a hundred times more complex and technical.

And this should lead us to the truth of regulations… the more complex the issue is the more dumb must the regulators act, like refusing trying to understand it all, and stubbornly holding to some simple rules of thumb… like 8 percent of shareholder’s equity against any asset.

The role of the regulators is not to control the banks for the perceived ex ante risks, the expected losses, that is the job of the bankers and, if they can’t do that they should not be bankers. The role of the regulator is to safeguard against eventual ex post risks, unexpected losses, and since the unexpected cannot be calculated, they can for instance allow themselves not having any knowledge of calculus.

God save us from the hubris driven intelligent besserwisser spread-sheet equipped regulators trying to outsmart bankers.

May 02, 2014

What if by lottery some patents are yearly declared null, in order to keep the pharma industry on its toes?

Sir, David Shaywitz writes: “If the pharmaceuticals industry is to remain in the vanguard of science it will have to embrace a far leaner approach, with less bloated bureaucracy”, “Addiction to deals reveals the depth of pharma’s ill” May 2.

Is that really possible in an industry accustomed to working in the protective environment provided by patents? Is it not high time we see to that all that extra money we are asked to pay in order to reward inventions and stimulate new inventions go to that, and not to some other purpose, like the further enrichment of a 0.01% plutocracy?

Perhaps a yearly lottery, by which 5 percent of their patents are declared null, no reasons given, could give these companies more incentives to be on their toes.

Call it a dividend to humanity if you want… in payment for how humanity helped the inventors run the last mile for a patent.

May 01, 2014

When referencing cash, remember it is usually not really cash... & do we need special taxes on profits from patents?

Sir, I refer to Sarah Gordon’s “Be wary of the tax incentives in pharma’s deal financing” May 1, in order to make the following two observations:

First I believe that we should take the opportunity of the inequality frenzy that Piketty’s Capital has brought on, to discuss the treatment given to intellectual property right profits… as there can be little discussion that patents and similar, are among the biggest de facto inequality drivers. I, for instance, have held for some years that profits obtained under the umbrella of patents, and or of extravagant market shares, should be taxed higher than profits obtained from competing naked in the markets.

Second, when Gordon writes about the “$1.64tn of cash” that Moody estimates US companies held at the end of 2013, she would do better referring to “$1.64tn of liquid assets”… since we have no reason to believe the CFO’s of those companies keep stacks of notes hidden in their mattresses. I say this because we should not forget that any alternative use of these assets, will require their disposal… which has other effects in the market.

What’s the use of splendid arteries in the US if its heart does not pump?

Sir, you again express concern about that “US infrastructure is crumbling” May 1, and that is very nice of you. But, considering you are the Financial Times, and not the Bridge Construction Times, should you not better concentrate on how the heart of the financial system, the banks, in “the land of the free and the home of the brave”, is pumping less and less of that true risk-taking needed in order to keep the economy moving forward, in order to have something to transport on those bridges?

Again, just as a reminder, in case you’ve forgotten: capital requirements for banks which allow banks to earn much higher risk-adjusted returns when lending to “the infallible” than when lending to “the risky” is pure bad heart attack provoking cholesterol.

PS. You refer to a bill drafted by John Delaney that would give US companies a tax break on any repatriated foreign earnings invested in US infrastructure… have you asked yourself in what assets those profits are currently invested and had to be liquidated in order to do that?